IP lawyers and their experts need to link copyright infringement to specific lost revenues

Interplan Architects, Inc. v. C.L. Thomas, Inc., 2010 WL 3982273 (S.D. Tex.)(Oct. 8, 2010)

The plaintiff submitted architectural drawings and designs to the defendant to build nine different convenience stores in Texas. Three years later, the plaintiff discovered that the defendant had given the drawings to two other architectural firms to build several stores, and the plaintiff sued all three parties for copyright infringement under federal copyright laws, 17 U.S.C. § 501 et seq.

In general, a copyright owner may recover actual damages as well as the infringer’s profits that are specifically attributable to the infringement. That is, the owner must demonstrate a direct causal link between the infringement and the particular profit stream. Only then does the burden shift to the infringer to prove that the revenues were attributable to factors other than the copyrighted work.

Difficult to parse revenue streams of major infringer. In this case, the plaintiff’s expert estimated that one of the infringing architectural firms had earned $157,000 from designing three infringing stores and the firm had earned $664,000 from designing eleven stores. The court quickly found that the firms’ realization of profits were “exactly the type of ‘infringer’s profits’” contemplated by the federal copyright laws, and admitted the expert’s evidence pertaining to these two firms.

The plaintiff’s expert also estimated that the primary defendant (the owner of the convenience outlets) had realized nearly $512 million from eleven infringing stores. The defendant argued this failed to demonstrate the necessary causal link between its gross revenues and the alleged infringement of the plaintiff’s architectural plans—and the court agreed that these particular calculations presented a “more difficult issue.” Unlike the calculations for the infringing architectural firms, these did not involve assessing the direct profits that the store owner made by selling the infringing works. Rather, this case required the plaintiff’s expert to assess the owner’s “indirect profits” from using the infringing stores to sell other products, including food, drink, and general merchandise that it might have sold “irrespective of the plaintiff’s designs,” the court said.

As a result, the court found that the plaintiff was required to do more than “simply identify the infringing stores” and then designate all revenues as resulting from the alleged copyright infringement. The plaintiff must also provide some “non-speculative evidence” that the store owner’s revenues were caused or in some way affected by the particular architectural design of the stores:

Most helpful to the court would be a comparison between [the] defendant’s projected revenues for the infringing stores and the realized revenue (which may provide some support for the proposition that store design had an effect upon the revenue), or between [the] defendant’s non-infringing stores and the infringing stores that controls for variable such as location, traffic, and pricing.

Because the expert’s $512 million damages calculations did not identify or attempt to quantify the impact the design had on the infringing stores’ profitability, the court granted the defendant’s Daubert motion without prejudice, thereby giving the plaintiff (and the expert) an opportunity to resubmit evidence that satisfied the causal requirements of the copyright laws. Given this ruling, the court also excluded any evidence from the defendant’s rebuttal expert that pertained to the plaintiff’s expert’s estimate of gross revenues, including his calculation of deductible expenses.

Defendant’s independent experts also challenged. The defendant presented a second expert, a CPA with a specialty in the gasoline and convenience store industry, to provide independent evidence that 1) the defendant’s store layout and elevation had “significantly small” impact on shoppers’ purchases, compared to other store features; and 2) the portion of profitability related to store design was nominal.

The plaintiff challenged this expert’s evidence as improper ipse dixit (“because I say so”), and the court agreed. The expert didn’t just render an opinion on the factors that affect a convenience store’s profitability. He attempted to estimate “the degree to which store layout and elevation affect either a shopper’s buying experience or a store’s profitability,” the court explained, with emphasis. Presumably, he relied on some data to reach this opinion, and in fact, during his deposition he admitted developing some “balance scorecard programs” to assess the operational deficiencies of the subject stores from site design to internal operation, merchandising, and product sets.

However, the expert simply arrived at his conclusions without specifically describing the data or his quantitative analysis, the court held. “He does not even describe the other ‘far more important store attributes’ that affect shoppers’ habits.” Moreover, to the extent the expert based his opinions purely on his background and experience without using any scientific or technological methodology or providing any means to question how he arrived at his conclusion, his opinions were unreliable, and the court excluded them without leave to amend.

Finally, the defendant’s third financial expert, also a CPA, attempted to show that plaintiff’s project profit percentage from the specific designs at issue should be 15.5%, which would limit its damages claims to no more than $25,000. The expert derived this margin by adding the plaintiff’s gross revenues on three years of tax returns and then subtracting project expenses and overhead. However, these gross revenues applied to all of the plaintiff’s projects during those years, not just those related to the defendant’s convenience stores. When he calculated this percentage, it amounted to 42.5%, thereby reducing the margins on the plaintiff’s remaining projects to 10.6%. This was unreasonable, he believed. By selecting the 15.5% margin, he could keep the plaintiff’s profits for the infringing stores in line with its other projects.

Further, the expert declined to use the plaintiff’s profit and loss statements as a basis to derive its project profit percentage, because they were inaccurate and omitted certain costs from the project expenses category, which in turn inflated the plaintiff’s project profitability. But none of these objections attacked the expert’s methodology. Instead, the dispute focused on which data would support the most reliable calculation of a profit percentage. “The court does not find [the expert’s] opinion unreliable simply because he chose to use [the] plaintiff’s tax returns as opposed to [its] profit and loss statements.” Ultimately, the jury would determine which measure it found more persuasive after hearing from both the plaintiff’s and defendant’s experts, the court held, and admitted the evidence from the defendant’s financial expert.